by Todd McNeill, Senior Director

There is no question the past few years in the commercial real estate financing world have not been pleasant.  At the recent Commercial Real Estate Finance Conference (CREF), sponsored by the Mortgage Bankers Association (MBA) the common feeling from industry insiders was “cautious optimism” as discussed in Part 1 of our review of the future of the commercial real estate finance industry.  Some facets of the business have already shown growth while others are moving a bit slower but nonetheless in a positive direction.

Moving From Bottom


The commercial real estate markets just came through the worst economic crisis since the Great Depression.  A crash and burn like this is not something that an industry can bounce back from overnight.  However, commercial real estate insiders appear to be seeing a light at the end of the tunnel, especially since attendance and enthusiasm were higher than in previous years, and there appears to be good reason for the upbeat attitude.

Reasons for Optimism


For now Private Lenders, Life Insurance Companies, Credit Companies and now, the return of some of the Securitized Lenders will be the primary sources of new real estate debt albeit some of the banks are starting to return to the market as well.  Construction loans are still challenging, however, banks are no longer avoiding the discussion although apartments and healthcare are the preferred commercial property types.  The securitization market also seems to have kicked back into gear and some of the tentative return by banks into the commercial real estate market may be due to the return of CMBS 2.0.

CMBS 2.0


The post-credit commercial, mortgage-backed securities, labeled by industry insiders “CMBS 2.0” will be a deciding factor in the question of whether CREF is moving forward when a huge chunk of money is set to be securitized over the next few months.  In addition, B-Piece investors are few and far between, and this type of investor will need to surface in order to keep the momentum going.  There is $6 billion in the pipeline which is expected to be securitized in the next few months.  This is one of the reason some insiders continue to urge caution.  Assuming the market absorbs this pipeline, about $40 to $50 billion of CMBS 2.0 is expected to be securitized in 2011.  This is almost double 2010 production but a shadow of the $313 billion securitized in 2007.

Reason for Caution


We are done with “Extend and Pretend” as banks have sufficient earnings to write down assets and move bad loans off their books.  With assets moving into the market to trade, this should create a reasonable pipeline of new acquisition opportunities and correspondingly, transactions for Lenders and Capital providers.

The massive Dodd Frank Wall Street Reform and Consumer Act provides some of the new “ground rules” for commercial real estate.  Lenders that are returning to the market are providing their own discipline standards to meet the intent of the Act without compromising the ability to securitize loans.  CMBS Lenders are already making transactions simpler with only six or seven investment branches (versus dozens in the heyday).  The adaptation of more standardized documents, increased diligence and less reliance on the rating agencies will be part of the game going forward.  Most importantly, the B-piece investor will have to maintain at least 5% of the risk in any new CMBS 2.0.  Finally, the new rules will give the senior A-piece investor a much bigger voice in selecting the Special Servicer as well as what happens to the loan(s) should a default occur.

Overall, commercial real estate finance appears to be recovering from the recent financial crisis, and this may be the perfect opportunity for new investors to seek new assets.  A slow movement toward recovery is occurring and industry insiders are seeing improvement in the marketplace.  The cautious optimism felt at the recent CREF Conference is an indication that commercial real estate finance is finally moving in an positive direction.